Problems
Problem 144
Problem 147
Problem 1415
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Problem 144
a.
Total Debt
5,000.00
Interest rate
10.00%
ABC
XYZ
Debt
Equity
Debt
Equity
FCF
Payments
Dividends
Payments
Dividends
800.00
0
800
500
300
1,000.00
0
1000
500
500
b.
equity in ABC would
10.00%
provide cash flows of
80.00
or
100.00
per year
These cash flows could be replicated by
owning
10.00%
of the debt and
10.00%
of the equity of XYZ.
The debt cash flows would be
50.00
per year
50.00
in either case.
The equity cash flows would be
30.00
or
50.00
per year
For total cash flows of
80.00
or
100.00
per year, as you would get from buying ABC equity.
c.
Suppose you hold 10% of the equity of XYZ. If you can borrow at 10%, what is an alternative
strategy that would provide the same cash flows?
equity in XYZ would
10.00%
provide cash flows of
30.00
or
50.00
per year
These cash flows could be replicated by
borrowing
500.00
and buying
10.00%
of the equity of ABC.
You would receive dividends of
80.00
or
100.00
and pay interest of
(50.00)
per year
(50.00)
in either case.
for a total cash flow of
30.00
or
50.00
per year, as you would get from buying XYZ equity.
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 Winter '12
 Dutt
 Taxes, Corporate Finance, Debt, Interest

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